Securities and Exchange Commission v. Talley Industries, Inc.

American Industries Fund (Fund) was a registered investment company that owned 9 percent of Talley Industries (Industries) (defendant). Industries became interested in taking control of General Time Corporation (General Time), a much larger firm. The president of Industries, Franz Talley, contacted George Chestnutt, the president of Fund’s investment adviser, Chestnutt Corporation. Talley explained to Chestnutt that Industries might seek to acquire General Time and Fund might find General Time shares to be a good investment. Chestnutt consulted his counsel and was advised that Fund could purchase General Time shares so long as it maintained complete independence in the acquisition and did not make any promises or arrangements as to voting, disposition, or otherwise. Chestnutt subsequently had Fund acquire nearly 10 percent of General Time’s shares. General Time’s board rejected Industries’ merger proposal. Industries then increased its stake in General Times to 12 percent. The Securities and Exchange Commission (SEC) (plaintiff) insisted that Industries apply for retroactive approval of the share purchases Industries and Fund had made. Industries applied, and the SEC denied the application, concluding that Industries and Fund had violated § 17(d) of the Investment Company Act (ICA) by entering and carrying out a joint arrangement without SEC approval. The SEC concluded that Industries and Fund were significantly combined to form a joint entity within the meaning of the ICA. The SEC brought an action in district court seeking to enjoin Industries and Fund from acquiring more General Time stock and to require Industries and Fund to withdraw any votes cast at General Time’s stockholders’ meeting. The district court dismissed the SEC’s complaint. The SEC appealed.